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It can make good investment sense too. Remember, someone with a lot more money than you decided that they couldn't make a better return than financing your home

by mark-r 10y ago

It can make good investment sense too. Remember, someone with a lot more money than you decided that they couldn't make a better return than financing your home loan. Paying off a loan is an illiquid investment, but it's the highest guaranteed return you're going to find. And so what if you lose the tax deduction for interest? You'd pay taxes on any alternative investment anyway, so it's a wash.

ghaff 10y ago
Right. I run into a lot of people who will argue passionately about how stupid it is to pay down your low interest mortgage early given alternative investments. At the same time, many of them will not agree that taking out a HELOC so you can play the stock market is a good idea. The two situations aren't really equivalent given liquidity, etc. But at the margins they're pretty much the same thing.
fossuser 10y ago
Makes sense if you've already got a mortgage, but house buying seems tricky to me. With property tax and home owners association fees even with your house paid off you still basically have a permanent rent. I guess in some sense you're playing the housing market, but seems like having more options and ability to move is a pretty good deal. Renting also seems a lot cheaper (even with bay area rents).
OneOneOneOne 10y ago
> someone with a lot more money than you decided that they couldn't make a better return than financing your home loan I'm not sure this is how fractional reserve banking works. Banks only supply a fraction of depositors money against a mortgage with the majority supplied by the fed. They basically make their money by investing other peoples money (including fed "imaginary" money) and by keeping a relatively low default rate.
- mark-r 10y ago
  Loans may be originated by banks, but most get packaged and sold as securities. It's those securities that I'm talking about.
- Scarblac 10y ago
  That's not how fractional reserve banking works. It works by getting money in deposits and then loaning out most of it, keeping only a fraction in case some depositor wants his money back. The reason that that act creates money is that the money in the deposits can still be requested by depositors at any moment -- it's still fully liquid, and thus the depositors still have their money. But so does whoever borrowed money. The effect is compounded a lot by the fact that the borrowed money will also end up in some bank account almost certainly, and be almost entirely lent out again, and so on.
  - slv77 10y ago
    Nit pick... Banks create the money when they create the loan. Assume the simple case where the buyer of the house has an account at the same bank as the seller. The bank puts an credit on its books for the loan and a debit on its books for the sellers account. The money in the sellers account is newly created money. They didn't have to ring up the Federal Reserve or get permission. They got the permission when they got their banking license. Let's assume the buyer now wants to move that money to another bank. He transfers his deposit from bank A to bank B. Bank B now has excess funds on its books and deposits it at the central bank. Bank A now has a deficit and goes to the central bank for a loan. The central bank loans money on deposit from Bank B to Bank A and everything balances. Now let's say he wants to convert it to cash. He goes to Bank B and withdraws his deposit in cash. Bank B then goes to the central bank and requests the funds. The central bank then gives a loan to the central government for the amount of cash that it needs. Then it takes that loan to the central government which issues cash in the value of the loan. Bank B then exchanges its deposit at the central bank for cash and gives it to the customer. The central bank now has a deposit from the central government in the amount of the loan from Bank A and so everything, again, balances. The only restriction that banks have on creating money these days is the ratio of equity against the entire size of their balance sheet.
    - Scarblac 10y ago
      Bank A doesn't need to get a loan yet after the money is moved away to bank B, after all they kept a percentage of the original deposit, so they have sufficient reserves. Right?

by mark-r 10y ago

ghaff 10y ago

Right. I run into a lot of people who will argue passionately about how stupid it is to pay down your low interest mortgage early given alternative investments. At the same time, many of them will not agree that taking out a HELOC so you can play the stock market is a good idea. The two situations aren't really equivalent given liquidity, etc. But at the margins they're pretty much the same thing.

fossuser 10y ago

Makes sense if you've already got a mortgage, but house buying seems tricky to me. With property tax and home owners association fees even with your house paid off you still basically have a permanent rent. I guess in some sense you're playing the housing market, but seems like having more options and ability to move is a pretty good deal. Renting also seems a lot cheaper (even with bay area rents).

OneOneOneOne 10y ago

> someone with a lot more money than you decided that they couldn't make a better return than financing your home loan I'm not sure this is how fractional reserve banking works. Banks only supply a fraction of depositors money against a mortgage with the majority supplied by the fed. They basically make their money by investing other peoples money (including fed "imaginary" money) and by keeping a relatively low default rate.

mark-r 10y ago
Loans may be originated by banks, but most get packaged and sold as securities. It's those securities that I'm talking about.
Scarblac 10y ago
That's not how fractional reserve banking works. It works by getting money in deposits and then loaning out most of it, keeping only a fraction in case some depositor wants his money back. The reason that that act creates money is that the money in the deposits can still be requested by depositors at any moment -- it's still fully liquid, and thus the depositors still have their money. But so does whoever borrowed money. The effect is compounded a lot by the fact that the borrowed money will also end up in some bank account almost certainly, and be almost entirely lent out again, and so on.
- slv77 10y ago
  Nit pick... Banks create the money when they create the loan. Assume the simple case where the buyer of the house has an account at the same bank as the seller. The bank puts an credit on its books for the loan and a debit on its books for the sellers account. The money in the sellers account is newly created money. They didn't have to ring up the Federal Reserve or get permission. They got the permission when they got their banking license. Let's assume the buyer now wants to move that money to another bank. He transfers his deposit from bank A to bank B. Bank B now has excess funds on its books and deposits it at the central bank. Bank A now has a deficit and goes to the central bank for a loan. The central bank loans money on deposit from Bank B to Bank A and everything balances. Now let's say he wants to convert it to cash. He goes to Bank B and withdraws his deposit in cash. Bank B then goes to the central bank and requests the funds. The central bank then gives a loan to the central government for the amount of cash that it needs. Then it takes that loan to the central government which issues cash in the value of the loan. Bank B then exchanges its deposit at the central bank for cash and gives it to the customer. The central bank now has a deposit from the central government in the amount of the loan from Bank A and so everything, again, balances. The only restriction that banks have on creating money these days is the ratio of equity against the entire size of their balance sheet.
  - Scarblac 10y ago
    Bank A doesn't need to get a loan yet after the money is moved away to bank B, after all they kept a percentage of the original deposit, so they have sufficient reserves. Right?